Chicago Fed National Activity Index Fell in July A total of 34 of the 85 indicators improved from the previous month, while 51 declined.
The index, which provides a snapshot of national economic activity and inflation pressures, registered 0.13 in July, compared with 0.48 in June.
A value of zero for the monthly index is associated with the national economy expanding at its historical average. Positive values reflect above-average growth while negative values reflect below-average growth. (…)
The index’s three-month moving average fell to 0.05 in July from June’s 0.20 reading.
(Global Car Sales Hit Speed Bump After nearly a decade of growth, new-vehicle sales in the world’s largest auto markets are entering their first sustained slowdown since the global financial crisis as uncertainty around the U.S.’s trade policies looms.
(…) Last week, Continental AG , the world’s second-largest auto-parts supplier, also warned investors its profits could take a hit this year, blaming softer demand for cars in Europe and China. (…)
Global auto sales have increased steadily since 2010, rising on average more than 5% annually. This year, car sales are on track to hit 97 million vehicles world-wide, but the growth rate is expected to slow to 1.8% over 2017, according to forecasting firm LMC Automotive. (…)
New-car sales in China fell 5.3% to 1.59 million in July, compared with the year-earlier period, surprising investors and causing auto makers to rethink their forecasts. For the full year, sales are forecast to grow 1.2% over last year, according to LMC Automotive, down from a 13% growth rate in 2016 and 2.1% in 2017. (…)
U.S. auto sales, having peaked in 2016 at a record 17.5 million, are on track to decline in 2018 for a second year in a row.
In Europe, new-car demand has nearly returned to its pre-financial crisis peak. Sales of new cars in the European Union were up 2.9% in the first half, but that is down from the 4.7% growth posted in the first half of 2017. (…)
Early Indicators Show China’s Economy Weakening Again in August
(…) That’s according to a Bloomberg Economics gauge aggregating the earliest available indicators on business conditions and market sentiment. (…)
SF Fed: Yield Curve Suggests Rising, But Still Low, Risk Of Recession The bond market is signaling that the risk of recession is rising but a downturn is far from imminent, new research by the Federal Reserve Bank of San Francisco released Monday said.
The bank’s paper looked at what has been happening with the Treasury bond yield curve, which tracks the return investors get based on the maturity of the security they own. (…)
Fed officials tend to focus on the relationship between the two- and 10-year note, but the San Francisco Fed paper said there is a more reliable way to link inversions and recessions.
“The difference between 10-year and three-month Treasury rates is the most useful term spread for forecasting recessions,” bank economists Michael Bauer and Thomas Mertens wrote.
The authors cautioned, in a refrain common to central bankers, that it is unclear whether inversions cause recessions or correlate to them. But even so, inversions have been a “a reliable predictor” of recessions, they wrote. (…)
“The recent evolution of the yield curve suggests that recession risk might be rising,” they wrote. But, “the flattening yield curve provides no sign of an impending recession.”
NAFTA
Trump Hails Mexico Trade Pact, Casts Doubts Over Canada President Trump moved closer to revising the North American Free Trade Agreement by striking a deal with Mexico, but raised new doubts over the quarter-century-old pact by threatening to leave out Canada.
(…) The Trump administration said it would give Canada until Friday to iron out crucial differences, including a revision that makes it harder for Nafta members to challenge U.S. trade penalties. While Mexico accepted that change, Canadian officials have said for months that would be unacceptable. (…)
“I think with Canada, frankly, the easiest thing we can do is to tariff their cars coming in.” (…)
The agreement waters down a part of Nafta that gives multinationals extra legal protections when investing overseas by allowing them to file complaints against the home governments in special NAFTA-run arbitration panels, rather than having to rely on local courts.
“This new agreement would curtail fundamental protections against expropriation, arbitrary and discriminatory government conduct, protection of long-term project contracts, rights to repatriate profits and capital, and the right of investors to enforce their rights in neutral arbitration tribunals,” said Daniel Price, a top trade official in the George W. Bush administration, who had helped create and promote those investor protections as a U.S. negotiator.
“This is a dramatic reversal of longstanding U.S. policy supported by successive administrations,” Mr. Price said.
But the main concern expressed by lawmakers and businesses Monday was the prospect that a new Nafta may jettison Canada, a change they said would diminish the benefits and efficiencies the pact has provided, and inject new uncertainties over supply chains and business deals built around the assumptions of a three-nation trade bloc.
“It is critical that any modernized Nafta continue to include all three North American partners,” said Rufus Yerxa, head of the National Foreign Trade Council, a leading free-trade business organization. “The only way we can compete for global markets with Asian and European producers is to maintain and strengthen the entire North American production base,” he added. (…)
The Canadian government will also likely issue strong objections to a changed agreed on by the U.S. and Mexico to remove a Nafta provision allowing the member states to use special Nafta panels to challenge certain tariffs imposed by governments against imports from the other partners.
Canada has long insisted on such protections for its companies, and has argued that their importance is even greater under the Trump administration, which has been more aggressive than previous U.S. governments in imposing tariffs on Canadian products.
At the outset of the Nafta renegotiations, Mr. Trudeau said preserving those Nafta courts was “absolutely essential for Canada.”
- Automobile production Under the new agreement, 75% of the content in automobiles must be sourced in North America to quality for tariff-free treatment, up from just 62.5% under the current Nafta.
- High-wage auto production The agreement stipulates that between 40% percent and 45% of auto content must be produced by workers earning at least $16 an hour. This would force companies to either maintain more production in the U.S. and Canada—where wages are higher—or pay higher wages in their Mexican factories. Either way, the requirement reduces the incentive to outsource automobile and auto part production to lower-wage factories.
- Steel and aluminum inputs Certain key inputs in automobiles, such as steel and aluminum, must be sourced in North America. The agreement could help the Trump administration reach its goal of boosting U.S. steelmakers operations to 80% of their capacity, a goal targeted by the administration’s earlier steel and aluminum tariffs.
- Rules of Origin in Other Sectors New rules will also be in place for industries like textiles, chemicals, steel-intensive products and other industrial goods to qualify for tariff-free treatment, creating an incentive for more of that production in North America.
- Intellectual property Copyright holders will have full copyright protections in markets of all members countries. The chapter on intellectual property rights will be held up as a model for agreements with countries, including China.
- Digital trade Tariffs will be prohibited for digital products that are distributed electronically, such as e-books, videos, music, software and games. A chapter on digital trade was one obvious area for updating Nafta since the original agreement, written in the mid-1990s, had not accounted for the extent of today’s digital trade.
- Labor In addition to requiring higher-wage factories in the automobile supply chain, the deal would require Mexico to take specific steps to recognize collective bargaining rights, according to the U.S. Trade Representative. (…)
- Sunset clause The deal calls for a 16-year agreement with a provision for review after 6 years. (…)
- Dispute settlement (…) As part of the deal, the dispute settlement panels will remain for certain industries, but not others. Oil and gas, energy and infrastructure companies will retain their ability to go to the dispute settlement panels.
- Agriculture The U.S. and Mexico agreed not to impose tariffs on each other’s agricultural goods, and not to use export subsidies. (…)
Mexico Pact Eases Car Makers’ Concerns
(…) “This is mostly positive news for the [Detroit] Big 3,” she said. “There are just a handful of vehicles below that 40% or 45% threshold for wages that are imported to the U.S. from Mexico,” such as Honda HR-V and Nissan Sentra, she said.
Warren Browne, a Detroit-area consultant and former GM executive, said it is unlikely the new rules will prod the auto industry into shifting more jobs and production to the U.S. A 2.5% tariff for vehicle imports from Mexico could easily be absorbed and most companies would continue to base their sourcing decisions on labor costs and logistics, he said.
Trump’s Mexico Trade Deal Looks Like a Lemon Peer under the hood, and these auto rules pack less punch.
(…) Take those rules-of-origin requirements. These specify the share of a car’s content that must be made within Nafta, and have been at 62.5 percent for 16 years. Usefully, the National Highway Traffic Safety Administration already produces data on rules of origin so that U.S. consumers can buy local, and these show which cars would be affected by the change.
Based on the NHTSA’s data, there are just three models made in Mexico that are currently exempt but would attract tariffs under the new regime: Nissan Motor Co.’s Versa Sedan, Audi AG’s SQ5, and Fiat Chrysler Automobiles NV’s Fiat 500. Of these, only the Versa sells more than a handful of models in the U.S., with 106,772 vehicles shipped in 2017. (…)
The wage rules are likely to be tougher, though even there the devil is in the detail. Almost all non-Nafta content in Mexican-made cars sold in the U.S. comes from Germany, Japan or South Korea, where total compensation typically takes pay well above $16 an hour. So unless the requirement relates solely to Nafta workers earning at least $16 per hour (full details haven’t been released yet), the rules will only really affect vehicles that are at least 55 percent made in Mexico.
That’s a similarly small group. Excluding Ford Motor Co.’s Fusion and Fiesta, General Motors Co.’s Chevrolet City Express, and Mazda Motor Corp.’s Mazda2 – which are already off the U.S. market or heading that way – they sold a collective 658,640 units in 2017, according to our calculations. That compares with total imports from Mexico of about 2.44 million cars. (…)
About 70 percent of the country’s light-vehicle exports to the U.S. would be compliant under the new rules, with the remaining 30 percent getting a five-year phase-in period running through 2024, Economy Minister Ildefonso Guajardo told a press conference Monday. Even those that fall short would only receive the usual tariff of 2.5 percent for cars and 25 percent for trucks – levels that Volkswagen AG, Hyundai Motor Co., Kia Motors Corp. and others consider worth paying on swathes of models in return for Mexico’s drastically cheaper labor costs.
It’s likely to be a similar story with Canada, which shouldn’t be affected at all by the wage rules. “Canada should find it relatively simple to join the U.S.-Mexico consensus” and the agreement is a “fundamentally positive development” that should reduce perceptions of risks around Nafta, Brett House, deputy chief economist at Bank of Nova Scotia, wrote in a note after the announcement. (…)
Indeed, its modest nature should be considered a virtue, and global equity markets are quite right to be rallying in relief that this element of uncertainty has been lifted. If Washington can sell tweaks to existing treaties as historic victories that merit a ratcheting-down of global tensions, that’s good news for the other seemingly intractable trade disputes rumbling around the world.
Last spring’s trade agreement with South Korea was also for the show. The “deal” with Europe also. Canada and China must find ways to play similarly and we’re done with this “trade show”.
From the WaPo:
(…) A senior administration official acknowledged that it was possible the changes could make certain products, such as automobiles, more expensive for American buyers because the costs that go into production were expected to increase. (…)
U.S. to Pay Farmers $4.7 Billion to Offset Trade-Conflict Losses
Trump Dents Hopes for a China Deal After Agreement With Mexico
Bigger Sales Than Apple? China’s Huawei Doesn’t Need the U.S. The tech giant shipped more phones globally than Apple in the second quarter, despite its problems in the U.S.
Smartphone sales are falling globally, but a Chinese tech giant whose devices most Americans can’t even buy is doing a booming business, while nipping at the heels of Apple Inc.
Huawei Technologies Co., the world’s largest maker of telecommunications equipment, shipped more than 95 million smartphones in the first half of the year, an increase of more than 30% compared with the same period last year, the company said Friday. The company’s sales have risen sharply in markets such as Western Europe, the Middle East and India, according to International Data Corp.
In the second quarter, Huawei shipped more phones globally than Apple, making it the world’s second-largest vendor of smartphones after Korea’s Samsung Electronics Co. , according to IDC. (…)
Huawei sells few phones in the U.S. The company has been effectively banned from selling telecom gear there ever since a 2012 Congressional report alleged its gear posed a national security threat. Since then, network operators, the gatekeepers of the U.S. cellular phone market, haven’t partnered with Huawei to sell its phones. (…)
Huawei, headquartered in the southern Chinese tech hub of Shenzhen, has made inroads elsewhere: It is the No. 3 smartphone vendor in Europe, and is No. 1 in its home market of China. (…)
On Tuesday, Huawei said its unaudited revenue rose 15% to 325.7 billion yuan ($47.6 billion) during the first half of the year. Apple reported revenue during that time of $114.4 billion, according to S&P Capital IQ—a difference partly due to Apple’s fatter margins. Huawei phones fetch a lower price, with an average price of $269 compared with $848 for Apple, according to IDC. (…)
After tense year, Disney agrees to pay park workers $15 an hour
(…) “This represents a 50 percent bump in pay bringing starting wages to $15 an hour by 2021.”
The deal would also come with a $1,000 bonus for every employee, a plan that was unveiled last year after President Trump signed a bill slashing corporate tax rates. (…)
Disney joins Target as the latest national brand to commit to boosting wages to at least $15 an hour. In September, the retailer announced it planned to hit that pay goal by 2020. (…)
VALUATIONS WATCH
New highs in equities:
Not in valuations: the Rule of 20 P/E was 23.5 at the January peak, it is now 21.4, thanks to a 16% jump in trailing EPS (pro forma tax reform) more than offsetting a rise in inflation from 1.8% to 2.4%. The Rule of 20 Fair Value (yellow line = (20 minus inflation * EPS)) has thus increased from 2402 to 2690.
As we move past the tax reform impact and EPS growth slows to more “normal” levels, inflation trends will need to slow as well:
Meanwhile, small caps rose 13%!
World ex-USA is down 10.2% and sports a bearish 200 dma:
Still traveling, although “stuck” in Jasper Alberta because of the BC forest fires. There is no better place to get stuck than Jasper Park Lodge.
